The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, July 27, 2011

As previously predicted: RBA to hike interest rates at least 1-2x in 2011

Well, as predicted here more consistently and loudly than pretty much anywhere, Australia officially has a major inflation problem. And I mean "major".

Underlying or core inflation has been running at more than a 3.5 per cent per annum pace over the last six months. That is more than one percentage point above the RBA's implied 2.5 per cent per annum target, which just happens to be the highest inflation target in the developed world. (Remember, inflation is a tax on your savings).

As I have unwaveringly forecast--and reiterated only a week ago--we will get at least one to two rate hikes this year (in fact, we should in theory get three).

The currency market gets it, which is one reason why the Aussie dollar is currently trading at a near all-time high of 1.1035 US cents. Only a couple of weeks ago I flagged the risk of a surge in the Aussie dollar as foreign central banks seek to diversify into high-yielding Aussie government bonds.

August or September now loom as a near-certainty for the first RBA cash rate increase. And I reckon we will get another one before the year is out following which the RBA can probably sit pat.

What makes today's inflation numbers so much worse--we already knew that the cost of living indices were running at a circa 4 per cent annual pace--is that the June quarter was supposed to be a softer outcome. One where we got statistical payback for the incredibly high first quarter numbers.

All the economists were canvassing downside risks to their projections for core inflation of around 0.7 per cent. And many economists argued that the first quarter numbers had potentially been dragged up by the floods, even though core inflation is meant to strip out the impact of unusually strong price rises.

Recall also that throughout the last six months we have had huge currency appreciation (both in USD and trade-weighted terms), which, we were told, should have been deflationary. Indeed, the currency appreciation in the last quarter was much stronger (more than 3 times as much) as the appreciation in the first quarter.

Finally, we have had non-stop war stories of the "retail recession" and how there is massive, across-the-board retail discounting.

Guess what? They were all wrong.

In the first quarter, average core inflation was 0.85 per cent. In the second quarter, average core inflation was 0.90 per cent (taking the average of the trimmed mean and the weighted median).

And this is before Australia starts digesting an unprecedented increase in private investment via the commodity price boom and urbanisation of Chindia.

This is before Australia starts importing more inflation from China where wages and prices are sky-rocketing care of a pegged currency and inflationary US monetary policy.

This is with the benefit of a near 100 per cent appreciation in the currency from the 0.60 US cent lows touched in late 2008 and early 2009.

Glenn Stevens told our parliamentarians at the start of 2011 that the RBA had a history of getting "behind the curve" with respect to inflation, which has averaged an unacceptably high 3 per cent per annum over the last decade.

Glenn Stevens told MPs that the RBA had to learn from its mistakes, and that if you waited to remove all risk to your forecasts, if you waited to eliminate all uncertainty (as many have argued they should), it would be too late. The inflation genie would be out of the bottle, so to speak.

Well, underlying inflation in Australia has been running 40 per cent above the RBA's 2.5 per cent pa target for the last half year. The RBA is now well and truly behind the interest rate curve. It has not touched rates since November 2010, and rate changes today take around another 2 years to have their full-effect.

You read it here first. The doves have been quite sensationally blown out of the sky. Rates are heading higher.

I love this column , which echoes my views on the subject (see here ). Excerpt below... IF the value of your total assets fell by 6 per c...

Hey there...

I first started blogging on ideas relating to economics, finance, investments and housing following an invitation from Business Spectator. Please note that I may have an economic interest in any of the items discussed here. You should also be aware that these are my own personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations. Readers are urged to seek professional advice before making any investments. Call 1800 YBR YBR to find a financial planner near you.

About Me

While this is a personal blog, professionally Chris is a director and strategic advisor to a number of funds management and financial services companies. In 2009 The Australian newspaper selected Chris as one of Australia’s top 10 “Emerging Leaders” in its economics category. In 2007 Chris was selected by The Bulletin magazine as one of Australia's "10 Smartest CEOs" and by BRW Magazine as one of "Australia's Top 10 Innovators". He previously worked for Goldman Sachs and the RBA. In 2008-09, the Australian Government invested $20 billion in a radical policy proposal developed by Chris to provide liquidity to Australia’s securitisation market. In February 2009, Chris was invited by the Rockefeller and MacArthur Foundations to present innovative policy solutions at the private Transforming America’s Housing Policy summit for Obama Administration officials. Chris served as a Director of The Menzies Research Centre from 2003-07. He has published widely on matters relating to financial economics, and is a regular TV and media commentator. He is a Research Affiliate with the Centre for Ideas and The Economy at Melbourne Uni.